What happened
Shares of Farfetch (FTCH -2.22%) were pulling back last month as concerns about rising interest rates and an increasing risk of a recession weighed on the e-commerce luxury fashion stock. Other than a negative analyst note, there was little company-specific news on Farfetch in the month. Though, the company is sensitive to the macro environment, so the sell-off wasn't surprising.
According to S&P Global Market Intelligence data, the stock finished the month down 26%. As you can see from the chart below, the stock actually gained early in September but then slid through the second half of the month as the macroeconomic picture worsened.
So what
The chart shows Farfetch traded mostly as a highly volatile version of the S&P 500 last month as the stock rose in the second week when market sentiment momentarily improved. However, the stock peaked right before the consumer price index report came out on Sept. 13, tanking the S&P 500 and Farfetch, which lost 7.7% that day.
Farfetch is sensitive to rising interest rates for a number of reasons. First, luxury goods are discretionary purchases, which tend to decline in recessions. Further, most of Farfetch's sales come from outside of the U.S., though it reports results in dollars. That means it's particularly sensitive to the stronger dollar, which is partly a result of rising interest rates. Finally, Farfetch is currently unprofitable, and rising interest rates make future earnings less valuable because the discount rates in financial models rise, pressuring growth stocks.
The stock fell again the following week as the Federal Reserve raised interest rates by 75 basis points and said that rate hikes would continue. And on Sept. 26, it fell another 6% after Citigroup rated it a sell. Analyst Guido Lucarelli said it was hard to see a path to profitability and that its recent deal with Yoox Net-a-Porter (YNAP) wouldn't impact its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin.
Now what
Farfetch stock boomed early in the pandemic as luxury e-commerce shopping was popular in China and other parts of the world. However, the company's performance has slumped over the last year, and the stock is down more than 80% from its peak last November.
A recession would pose an additional challenge for the company, but Farfetch does offer considerable upside potential at the current price, given it's the leading online luxury platform. Still, the stock will likely be volatile over the next several months as the market continues to swing on interest rate concerns.
